Global Economic Crisis: Part VII.

African countries which are now feeling the impact of the financial crisis (as one World bank top official rightly dubbed African economies ‘innocent bystander’) and subsequent recession that has hit western economies so severe that, some countries are reporting negative growth (contraction) of up to 13% of GDP (eg in East-European economies of Lithuania and Latvia), will come out of the crisis last due to structural problems in these economies which may not adjust as flexible as developed economies. Reasons behind this lag to get out of the crisis faster range from the fact that, their political economies which impact severely on the real sector may not have the capacity to position their economies turn them around. Most of such political economies are either not aligned to the development of the real sector, or is not a top priority despite the rhetoric to that effect. Systematic lack of political commitment (where self interest of a few political elite takes precedence at the expense of national interests) means that such systems are not well placed to take on the crisis with the highest degree of urgency it deserves. Some of such systems may not even comprehend the magnitude of the global crisis let alone its impact to their local economies, more than is obtained from the print and electronic media. No research is done to ascertain impact of such crisis nor basic investigations into the same except putting in place task forces/committees which in them selves lack the capacity and expertise to dissect such complex financial issues and to give valuable advice that would then be used by those in polity to institute mitigation measures. This gives rise to ‘a spectator like’ approach by such countries, or at best request experts from multilateral institutions to study situations and give reports which will also be put on shelves of the bureaucrats. Political upheavals that manifest themselves in different forms and shapes among these countries also create uncertainty that aggravates the potential risk exposure on such countries and makes economic agents dormant especially during such crisis. Thus, the impact of coups, counter-coups, perennial civil wars, undemocratic change of leadership, revolutions, rigging of elections, and buy-outs which even if they happen in a third country, nevertheless, are felt by other countries, especially so because Africa is viewed as ‘one country’ among man potential investors not conversant with the continent, and their misconceptions are generally rallied to financial markets. The other reason which was highlighted in earlier articles, is the depth of Africa’s financial markets which is too shallow to be used as a tool to manage the complexity of the current financial crisis. However, to appreciate the current crisis one has also to appreciate its spread channels and how it can be mitigated. First, low and or negative growth rates in the west has reduced the demand for Africa’s exports mainly primary exports which has in turn pushed prices of Africa’s primary exports to a half their value. This then means that, Africa’s balance of payments will be negative, which will lead to depreciation of their currencies. Global credit crunch has reduced capital flows to Africa and more so reduced trade finance with which to finance imports. This may also be made worse by reduced/delay donor funding as their sources are in red which diminish liquidity in Africa’s financial sector slowing its growth further. Recovery of African economies from the crisis will also be delayed by the fact that, there will be a time lag (could be longer) between when western capital markets avail credit to their economies, and other high return and politically stable emerging economies and when such markets will start to avail credit to African economies. Most of the highly capitalized financial institutions in Africa are also subsidiaries of parent financial institutions in the west, which are hard hit by the crisis. Thus, losses in financial assets in parent banks and other financial institutions will affect their subsidiaries affecting the quality of their credit portfolios and thus their financing portfolios in Africa as well. This as pointed out in earlier series will have a ripple effect to the entire financial systems as they are both large buyers and sells of financial instruments in such markets. Furthermore, current recession which will see trade decline by about 11% of the total world trade, will reduce fiscal revenues to African governments as low volumes of import and exports will translate into low customs revenues which to some countries is as high as 50% of their entire fiscal revenues. This will in turn constrain fiscal spending in key areas which are critical for the growth of the African economies such as infrastructure, and agriculture which will in turn compound poverty levels among these countries. Possible Mitigating Measures: The current crisis poses serious challenges to African policy makers because it is uncertain as to the duration it will take and more so because of the complex nature of the same. With regard to the duration, most optimistic economists argue that, it would start easing mid next year, whereas pessimists see it easing in 2011. As for its complexity, it is not certain how much it will cost most economies, and what measures may hasten its impact and put economies back to their normal growth curves. Nevertheless, assuming that, developed economies gets their economies back on track by at worst 2011, developing economies will have to contend with some time lag before they can experience easing out. This is based on the fact that, normal flow of credit to African economies will only be possible after such flow has reached optimum or near optimum levels in developed countries, a situation that will take time even after easing of recession in developed economies. As pointed out earlier, the impact of the crisis to developing countries has been different as it has to developed countries and as such there will be no single recipe for all African economies to mitigate the impact of the crisis. The most important objective of all these countries at this point in time is to maintain and protect their economic fundamentals to avoid these being offset as regaining them will be too costly. Thus, it is incumbent up on these economies to keep their inflation at low levels, keep structural reforms on track, ensure that trade liberalization is on course, and above all maintain sustainable levels of debt relative to GDP. The following measures will be vital if such countries are to mitigate the impact of the crisis: First, Africa economies will have to closely watch the movement in asset and liabilities of their financial institutions [monitoring of balance sheets],(banks, insurance companies, building societies, and other non-banking financial institutions) to avoid failures which may rock the entire financial systems. This is even more apparent for, whereas western countries with convertible currencies which they do print (is the case as now) as the situation demands to provide stimulus to such institutions with which they can write off their bad debts, developing countries can not do this as the cost (hyper inflation) would be too high to manage, and would in fact have both die economic, social as well as political consequences. Secondly, some developing countries in Africa especially those that maintain flexible (floating) exchange rates should use these to balance their growth as well as acting as shock absorbers to the current crisis. Under these conditions terms of trade deteriorate faster leading to depreciation of exchange rates (developed countries such as the UK has experienced the same), but this will serve to preserve macroeconomic stability in the medium term. As long as such countries keep their fiscal and monetary policies tight enough to avoid devaluation-inflation spiral, such currency depreciation may serve to cushion negative impact of adverse terms of trade among these countries and may even settle for moderate growth rates. To be continued...